In The USA: the Next Revolution

[Dayuhan]

One of the things people find unfair is the disparity between income tax and capital gains tax. They don't understand why a professional investor (let's say Warren Buffett) enjoys a 10% capital gains tax for one year's work while his secretary is taxed something like 28-35% for her sweat?

Capital gains taxes are kept low for a number of reasons. For one, investing money is something we really, really, want people to do, because investment creates productive enterprise and employment, around the world. For another, people who don't invest sometimes forget that investors don't always gain. Sometimes they lose. The government takes part of the gain, but it doesn't share in any loss. If I invest well and gain, Uncle Sam is there with his hand out. If I invest poorly and lose, he's nowhere to be seen.

I personally think some forms of very risky but very necessary investment, notably venture capital investments in startup enterprises, should see no tax at all on capital gains. Investing in new enterprise is something we want to encourage.

Now if you want to say we might want to create fewer incentives toward "investments" that consist mainly of flipping money from place to place, with that I'd agree, but the idea of taxing investment-related gains at a minimal rate, or in some cases not taxing them at all, is basically sound. You want to create tax advantages for behaviour you want to encourage, such as investment, and tax behaviour that you want to discourage. If you want to nail the rich, far better to lay massive sales taxes on things only rich people buy, thus creating an incentive to invest that money instead of spending it. Of course that would get a howl of protest from people who make stuff that rich people buy, but somebody is always gonna hurt.